Commissioner of Inland Revenue v Chipmunks Manukau Limited [2012] NZHC 2455 (21 September 2012)

Last Updated: 27 September 2012

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-48 [2012] NZHC 2455

BETWEEN THE COMMISSIONER OF INLAND REVENUE

Plaintiff

AND CHIPMUNKS MANUKAU LIMITED Defendant

Hearing: 20 September 2012

Counsel: MF Nelson for plaintiff

DG Hurd for defendant

Judgment: 21 September 2012

JUDGMENT OF ASSOCIATE JUDGE FAIRE

_{[on application for adjournment of liquidation proceedings]}

Solicitors: Inland Revenue Department, PO Box 76 198, Auckland 2241

Tucker & Co, 26 Hart Road, North Shore City 0622

THE COMMISSIONER OF INLAND REVENUE V CHIPMUNKS MANUKAU LIMITED HC AK CIV-2012-

404-48 [21 September 2012]

[1] The plaintiff’s application to put the defendant company into liquidation and

to appoint a liquidator was called before me on 20 September 2012.

[2] I do not repeat the background relating to this liquidation file, which is summarises in my minute of 14 September 2012. I nevertheless incorporate it as part of my reasons for the orders that I make in this judgment.

[3] The Commissioner is the only creditor who appears to support this application. The debt due to the Commissioner now exceeds $291,000. It is not disputed by the defendant company.

[4] In ordinary circumstances the Court would be most reluctant to further adjourn this proceeding because of the history of prior adjournments and the effect that adjournments have.

[5] A liquidation commences on the day on which a liquidator is appointed by the operation of the Companies Act 1993, s 241(5). The avoidance provisions contained in the Companies Act 1993, s 292 (dealing with transactions having a prejudicial) effect, s 293 (voidable charges), s 297 (transactions at an undervalue), s 298 (transactions for inadequate or excessive consideration) and s 310 (dealing with mutual credits and set-offs) have the trigger or start date for the period that can be reviewed, being the date when the liquidator is appointed. Therefore any delay in the disposal of an application for the appointment of liquidator pursuant to the Court's powers under the Companies Act 1993, s 241 has potential prejudice to the liquidator’s ability to make a recovery. That, of course, has a direct effect of the possibility of recovery on behalf of creditors.

[6] The courts have long expressed the view that it is not appropriate for lengthy adjournments of insolvency proceedings, whether they be personal or corporate because of the prejudicial effect on creditors. The position is enhanced by the change in emphasis which was introduced by the Companies Act 1993, s 241(5) which stipulates that the date for the commencement of the liquidation is the date the liquidator is appointed.

[7] The defendant company owns two franchises which are its core businesses. They are sited at Mt Roskill and in Manukau. They are child care centres. The franchise agreements were provided to me by counsel and not in the form of an exhibit to a sworn affidavit. Counsel for the Commissioner was also provided with copies. What is significant is that the franchises themselves may be terminated by the franchisor in the event of a company being placed into liquidation. That, understandably, is a real concern for the directors of this company who are most anxious to liquidate the assets in an orderly way and to attend to payment of the company’s liabilities.

[8] Prior adjournments have made. The most recent was that ordered in my minute of 14 September 2012. That minute recorded the three potential sources of funds to satisfy the Commissioner's debt, namely:

(a) The sale of one of the company’s businesses, being the business at

Mt Roskill pursuant to a sale and purchase agreement dated 18 July

2012 and which was originally due for settlement on or about

28 August 2012, but which has been extended for settlement to

28 September 2012;

(b) The company director’s husband obtaining funds known as the Lancer

Payments and applying those to the debt; and

(c) A payment of funds which the director’s husband said is due from the

Ministry of Social Development.

[9] On 14 September 2012 counsel for the defendant company advised of an approach for funding to enable a partial payment of $45,000 to be made and anticipated that that was a real prospect of occurring before the recall of the case before me on 20 September 2012. The bank to which the application for finance was made in fact rejected the application and that source of funding therefore ceases to exist. A new application for finance has, however, been made by the company to KiwiBank. That is currently being processed.

[10] A further development has occurred. The company, sensibly, has instructed a broker to endeavour to sell both its franchises. The Manukau franchise is said to be the stronger of the two. Any sale through the good offices of the broker would require a sole agency to be executed covering a period of 60 days. The broker’s estimate of realisable value from such sale is that the Manukau site could be sold for

$200,000 plus, and the Mt Roskill site for $100,000 plus. The information placed before the Court indicates, however, that if a liquidator was appointed and assuming that the franchisor did not rely on the franchisor’s power to cancel the franchise, realising the sort of values that I have just referred to, would be extremely difficult.

[11] The company’s director and her husband have guaranteed the current indebtedness of the defendant company to its bank and have secured their guarantee obligations by way of a mortgage against their residential home. So far no move has been undertaken by the bank, who has granted the finance no doubt because the mortgagor obligations are being complied with and the bank presumably is not troubled by a lack of security having regard to the registration of the mortgage against the home.

[12] If I were to order the immediate liquidation of the company and if the value of the businesses were lost as a result, the effect would be to leave the director and her husband exposed to the full amount of the borrowing from the bank and with no means other than the sale of their home of satisfying that indebtedness. That consequence may well have to be faced up to but, in the short term, I have decided that some further time should be allowed to avoid the quite drastic consequences that could flow.

[13] I am indebted to Ms Nelson for the assistance that she has given in suggesting appropriate conditions that should be attached to an adjournment. The conditions are important because if there is any risk of a dissipation of assets by granting further time to this defendant company that clearly would be wrong and would need immediate addressing.

[14] I have reached the view that an adjournment covering a maximum period up until 7 December 2012 is justified, but that there needs to be review along the way to

ensure that the conditions that I attach to the adjournment are met. Should they not be met then, clearly, the appropriate course would be for the appointment of a liquidator and the winding up of the company.

[15] I adjourn this proceeding to 11:45am on 12 October 2012. The purpose of the adjournment is to review:

(a) Whether the sale of the Mt Roskill franchise has settled and, if so, whether the net proceeds received from that sale have been paid in reduction of the debt due to the Commissioner;

(b) Whether the company’s director has been successful in raising funds

from an alternative bank to enable a partial payment of approximately

$45,000 to be made in partial satisfaction of the company’s debt to the

Commissioner;

(c) Whether any funds have been raised from the Lancer source or from the director’s husband’s expected receipt from the Ministry of Social Development and, if so, if any of those funds have been paid in partial satisfaction of the debt due by the company to the Commissioner;

(d) What steps, if any, have been taken to realise the Manukau business.

[16] I record the conditions on which the adjournment has been granted because it is likely that if those conditions are not adhered to strictly, that any further adjournment might be declined by the Court. Accordingly the conditions on which the adjournment has been granted are:

(a) Copies of all offers received for both the Manukau franchise and the Mt Roskill franchise shall be supplied to counsel for the Commissioner of Inland Revenue within 48 hours of receipt;

(b) Before any offer is accepted by the company for the sale of its assets it must give 48 hours notice of intention to accept such offer to counsel for the Commissioner of Inland Revenue;

(c) The company will make no financial commitments beyond paying the following during the term of the adjournment:

Rent, wages, electricity, gas, telephone charges, lease outgoings, insurances, party stock, food and beverages strictly for the operation of the two franchises only, petrol to run vehicles associated simply for the operation of the two franchise businesses, maintenance and repairs of the assets of the two franchises businesses including the motor vehicles operated for those two businesses, cleaning and laundry for the two franchise businesses, catering and consumables including packaging related solely to the operation of the two franchise businesses, current tax requirements, the instalment arrangements agreed to in respect of the company’s tax arrangements, bank interest, bank principle repayments, bank charges, EFTPOS charges, advertising which is within the budget that had been adhered to by the company to date for the two franchise businesses, office expenses, franchise fees, legal expenses, accounting expenses, rubbish and paper reclaim charges, school holiday programme costs, business and sale and marketing costs and any other expenses deemed reasonable by counsel for the Commissioner and approved in advanced of incurring liability for same;

(d) The company will incur no financial commitment in respect of its fixed assets except that which might be related to the proposed refinancing with KiwiBank;

(e) The company will not dispose of any of its assets except those that might be part of the operation of the company in its ordinary course of business;

(f) The company shall maintain its current obligations for PAYE and will file tax returns by the due date and pay all current tax by the due date.

[17] The company’s director shall certify in an affidavit to be filed no later than

10 October 2012 compliance with the conditions referred to.

[18] If the Court is satisfied on matters reported to it on the areas where funding might well be obtained for the purposes of satisfying the debt to the Commissioner, and that all the conditions attaching to the adjournment have been adhered to, an adjournment to the miscellaneous companies list at 11:45am on 7 December 2012 will be considered.

[19] The company must operate on the basis, however, that the Court has granted additional time beyond that which is usual in a company liquidation application. Unless the company has realised its assets and met its obligations to the Commissioner of Inland Revenue, further adjournments beyond 7 December 2012 are most unlikely as it is likely, should the Commissioner present evidence on non- payment, that a liquidator would be appointed at that time.

_{[20] I reserve costs in relation to the appearance on 20 September 2012.}

JA Faire
Associate Judge